Long gone are the days where businesses purchased software and maybe upgraded in one, two, or even three years. Now, most software comes in the form of monthly or annual subscriptions. While some people may gripe about the constant billing, it allows them to use the most updated software version at all times.
The software-as-a-service (SaaS) business model was born out of this thinking, and the businesses utilizing it often make great investments. This is because of a dependable revenue stream, allowing the software publisher's expenses to be optimized. Here's why three of my favorite SaaS stocks for 2022 are Shopify (SHOP 0.23%), Veeva Systems (VEEV -0.58%), and Procore (PCOR -1.99%).
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Shopify
Shopify's software provides e-commerce websites for its clients. Businesses can subscribe to Shopify's offering for as little as $29 per month. This essential service gives customers an online presence, a way to process payments, and some search engine optimization (SEO) tools. As a business grows, customers can purchase upgraded tiers to expand internationally and receive more favorable transaction fees. Shopify also offers point-of-sale (POS) hardware for businesses wanting a brick-and-mortar presence.
Shopify has emerged as one of the top e-commerce options for aspiring merchants and established businesses alike. It has processed $400 billion in gross merchandise volume (GMV) over the company's lifetime and processed the second most GMV of any e-commerce platform within the U.S. during 2020. Shopify's third-quarter revenue was $1.12 billion, up 46% over last year.
Shopify derives its revenue from two main sources, subscription and merchant solutions. The monthly subscriptions businesses pay for Shopify's service were up 37% to $336 million. Merchant solutions, or the revenue generated by each item sold on Shopify's platform, make up a larger part of Shopify's revenue stream. It was up 51% to $788 million due to processing $41.8 billion in GMV.
The e-commerce market is huge; Shopify believes it has a $153 billion total addressable market for small businesses alone. Shopify stands to capture a large market portion and will be a successful investment if it achieves its ambitious goals.
Veeva Systems
In the life sciences industry, strict regulations come into play for bringing new products to market. Veeva Systems helps companies manage these complex workloads by providing a single point of truth through its vault product. It also adds a customer relationship management (CRM) segment, allowing field sales teams to have the most insightful data when closing a deal.
Unlike many SaaS companies, Veeva is highly profitable. During the third quarter ending Oct. 31, it produced 31% more GAAP operating income at a 28% margin. When its FY22 data is examined, the operating margin stays the same, but its year-over-year growth accelerated to 38%. Revenue increased 26% to $476 million, indicating Veeva Systems has reached scale because profits are growing faster than revenue.
Looking forward, Veeva's management is projecting sales of $1.84 billion for FY22 and issued FY23 guidance of $2.16 billion at the midpoints of both. This represents year-over-year growth rates of 26% and 17%, respectively. While growth may be slowing, Veeva is reaching a point where it can reward shareholders by returning excess capital.
At 55 times price-to-free cash flow, Veeva Systems isn't cheap.
However, Veeva Systems is in the same valuation range where it has traded for a long time, giving investors confidence that they can purchase today without fear of getting burned by extreme price swings.
Procore
Construction has been one of the last industries to benefit from a digital revolution. Only recently has technology allowed workers on a job site access to the internet with both speed and reliability. Procore's aim is to connect all stakeholders on a construction project together through its software. It ensures contractors and subcontractors have accurate information by creating a single truth source that also links engineers and architects. Project financials can also be monitored in real-time, giving more visibility to the budgeting process.
G2 has recognized Procore as the leader in multiple software categories, and its quarterly results back it up. Q3 revenue increased 30% to $132 million and converted $6.5 million into free cash flow. Procore's gross margins sit at a healthy 83%, setting the stage for a target operating margin of 20% to 25% when it reaches full profitability years later.
Procore has the least market penetration of the three, as it is still rolling out its solution worldwide. France and Germany will be able to utilize Procore's software next year as it gains a foothold within Europe.
As Procore went public in 2021, investors haven't experienced a full year of results. With each successive earnings report, investors will gain confidence in Procore's ability to capture a massive market opportunity.
As the calendar inches closer to 2022, Shopify, Veeva Systems, and Procore should be on investors' radar. Each has put up solid 2021 results and will carry momentum into next year. SaaS stocks are known to be volatile, mostly due to high valuations. Investors must be prepared for large price swings, but if they can manage them, the price appreciation from these three growth stocks will likely beat the market.
